A Limited Liability Company (LLC) is a legal entity created under state law to allow individuals to run a business while protecting personal assets. LLCs provide liability protection and flexibility regarding profits and losses allocation. LLCs are governed by state law through an Operating Agreement outlining internal rules and regulations. LLCs are distinct entities, separate from the owners, providing them asset protection.
You can only sue an LLC for an issue about the company, not the members. Members enjoy protection from claims on personal assets like bank accounts and real estate as long as the LLC operates separately. LLCs combine beneficial aspects of partnerships and corporations – the simplicity of partnerships and liability protections of corporations. To create an LLC, you file articles of organization with your state, needing its own bank account and tax ID. Unlike corporations, LLCs don’t pay taxes directly. Instead, LLCs are “pass-through” entities.
While relinquishing control of assets to an LLC may seem frightening, it could protect them from creditors. An LLC owns property separately from owners, and members aren’t usually personally liable for LLC debts. A partnership operates under owners’ names, exposing personal assets to liability. LLCs limit liability in a way partnerships don’t. Weighing liability risk tolerance helps determine the right entity.
A single-owner LLC is treated like a sole proprietorship by default but can be treated as a corporation for taxes. Forming an LLC provides pass-through taxation and limited liability between sole proprietorships and corporations. It allows you to limit liability while operating flexibly regarding profits, losses and taxation.